Stored value in troubled times

The unrest gripping Syria may have created havoc on the economy, but there is one industry that has benefitted from the turmoil — the real estate sector.

Within days of the beginning of the protests last March, frantic construction activity began across most of the country’s informal areas. Syrians seized on a relaxation of strict construction rules and a general weakening of state control to rush and build in areas and lands normally out of their reach. The government, facing countrywide protests and with no appetite for causing further discontent by clamping down on small scale developers, kept its eyes closed.

One year later, there are up to half a million new housing units that are believed to have been built, leading to a temporary surge in the price of building materials and labor, and a change in the landscape of many suburban and rural areas. Although in the last few weeks construction activity has largely returned to normal, this temporary boom has shed light on the importance of the real estate sector in the Syrian economy and society.

In a region that, historically, has rarely been stable, that has seen countless invasions and that sits on the crossroads of several trading routes, the attractiveness of investments that can act as stores of value is great — and this obviously applies to real estate as it does with gold. Few Syrian men, for instance, can be considered to have succeeded in life — and for that matter can dream to marry — unless they own at the very least a residence. Thus, beyond its purely economic logic, investment in real estate has a social weight of its own. In recent years, several factors encouraged investment in the sector. They include excess liquidity held by Syrian expatriates and Gulf investors on the back of booming oil prices; limited other investment opportunities — because the Syrian business environment, comparatively to other countries in the region, remains very poor — and negative real interest rates; finally, supply bottlenecks in several segments of the market, including quality commercial properties and upscale housing properties, played a role. Thus, in the mid-2000s, several of the major regional developers, such as Majid Al Futtaim, Emaar and Qatari Diar, announced the launch of a variety of projects across the country, while local investors focused on smaller scale ventures.

In practice, however, only a handful of these landmark projects took off. Emaar’s Eighth Gate commercial development — which will host the Damascus Securities Exchange — located in the upscale Damascus suburb of Yaafour is the only one of significance that has moved ahead. Almost all the others remain burdened by endless bureaucratic and regulatory obstacles as well as legal disputes over land ownership. Indeed, beyond the traditional problems faced by all investors wishing to do business in Syria, many other hurdles hamper a proper expansion of the real estate industry. The lack of sufficient land and of proper zoning in many parts of the country, in particular in the densely populated urban centers, have led to a rise in informal housing, which represents today a staggering 40 percent of all housing units in the country, and to a lack of investment opportunities. Similarly, state control and administration over huge portions of land in city centers, for instance in the Central Business District of Damascus, have rendered any major commercial development in these areas almost impossible. Another impediment is the very low average rental yield of most properties across the country. It is not uncommon, for instance, for a mid-size residential property located in the center of Damascus and worth around $400,000 to be rented out at less than $10,000 per annum, or an average yield of 2.5 percent, very low not only by international standards but also by regional ones.

In the near term, the best hope for the sector lies, ironically, in the unrest gripping Syria. Indeed, nearing two months into 2012, the Syrian Pound lost 14 percent of its value compared to the US dollar — coming on top of a 34 percent decline last year — while the inflation rate has reached double digit levels. Both these factors encourage the role of the sector as a store of value. In the longer-term, however, the broader political dynamics will weigh in much more on the development of the real estate industry, and unless the current stalemate comes to an end quickly, real estate can only resist significant disinvestment, as is happening in the rest of the economy, for so long.


Note: This article appeared first in the March 2012 edition of Executive Magazine